A Shortage of Social Security

As the St. Petersburg International Economic Forum gets under way, it is striking to compare how much difference a year makes. For example, on May 19, 2008, the RTS Index hit a high for the year of 2,498. This May 19, the RTS fell to 940 before closing at 969. It has risen a bit since then but remains around 1,100, which is 40 percent below last year's high. From all appearances, the country's gross domestic product has not suffered to the same extent. During the first quarter, the GDP fell "only" 9.5 percent. But this is little consolation to those who have suffered the full impact of this contraction, including the rising ranks of unemployed, which increased 34 percent in the first quarter.

While the financial crisis is truly global, the situation in Russia is potentially more troubling than in most other countries. Despite the turbulent 1990s, Russians are still ill equipped to deal psychologically with the current crisis. Most Russians remember the "social security" of the Soviet Union, in which the state owned the means of production. Although there was an enormous gap between theory and reality, the one thing Soviet citizens could count on was a job until they reached pension age.

The new post-Communist world is very different, of course. Compounding the problem is that after so many years of communism, Russia never had any need to develop the economic tools that the West has found to be so important in coping with its periodic and recurring recessions.

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Today, Russia does not have the necessary tools and mechanism that could help it extract itself from its economic difficulties. For example, it lacks what Western economists have come to call automatic stabilizers -- measures that are turned out automatically and quickly without prodding from state authorities. One of the best examples is unemployment insurance. When employed, workers are required to pay a tax into a social insurance fund. Should they ever find themselves unemployed, the state will allow them to tap into this fund even if unemployment assistance is significantly lower than what they earned. In any case, when workers receive unemployment benefits, this results in an increase in consumption that otherwise would not have taken place. Equally important, the fact that consumption does not plummet to zero provides a stimulus for production and jobs that would otherwise be absent.

Since these kinds of income stabilizers were not necessary in the former centrally planned economy, Russia has been slow to institute them -- even 18 years after the Soviet collapse. Another example is bank deposit insurance fund, which was totally absent until January 2004. Even now, it protects only $27,000 in bank account deposits.

Nor has Russia's over-reliance on energy exports been good for the economy, particularly when oil prices fell from $147 a barrel in the summer to as low as $30 a barrel earlier this year. In the past month, oil prices have recovered, but since energy production accounts for over 50 percent of the country's export earnings, the drop in prices has had an impact across the board, affecting not only export earnings but also income tax revenues. This, in turn, has led to a destructive chain reaction of factory closings and layoffs in many different sectors.

What remains to be seen is how this reversal of economic fortune will affect the country's political climate. Vladimir Putin was extremely lucky to be appointed prime minister in August 1999 -- a time when the economy was at one of its lowest points during Boris Yeltsin's presidency. Beginning in 2000, however, the Russian economy grew at about 7 percent a year, which also coincided with Putin's stay in office. Understandably, the average Russian may come to associate the good times with Putin's tenure as president and the sudden change in economic fortunes with Dmitry Medvedev's presidency. In reality, of course, Medvedev has no more to do with the drop in oil prices than Putin had to do with their increase eight years earlier.

In any case, the burden will fall on Medvedev's shoulders to earn and retain the people's support during a deep, prolonged recession. Putin had it much easier.

Marshall I. Goldman, author of "Petrostate: Putin, Power and the New Russia," is a senior fellow at the Davis Center for Russian Studies at Harvard University